SFC to Enhance OFC Regime to Level Playing Field

The SFC will remove investment restrictions, expand custodian eligibility requirements, and introduce a statutory re-domiciliation mechanism. 

Hong Kong’s SFC (Securities and Futures Commission) plans to remove all investment restrictions for private OFCs (open-ended fund companies), in a bid to level the playing field with other private fund structures.

The decision follows a December 2019 consultation in which the SFC proposed several enhancements to the OFC regime, which came into effect in July 2018 and allowed for collective investment schemes in Hong Kong to be set up with variable capital company structure.

Under the current regime, at least 90 percent of the gross asset value of a private OFC must consist of investment in securities, futures contracts, cash, bank deposits, CDs, foreign currencies and foreign exchange contracts. Following the removal of this restriction, private OFCs will be able to invest in all asset classes without limit, including loans, shares and debentures of Hong Kong private companies.

The SFC will also allow licensed securities brokers to act as custodians for private OFCs, provided that they meet certain requirements as set out in the revised OFC Code – including at least HKD 10 million in paid-up share capital and HKD 3 million in liquid capital. The existing eligibility requirements under the current OFC Code essentially mean only banks or trustees of existing MPF trustees can be custodians, irrespective of whether the OFC is a private OFC or a public OFC.

New provisions will also be included in the OFC Code requiring investment managers and custodians to have sufficient expertise and experience
in managing and safekeeping asset classes in which an OFC invests, with corresponding enhancement on risk disclosure in the offering documents, and to keep proper records.

The changes removal of the investment restrictions and expansion of the custodian eligibility requirements will take immediate effect upon gazettal of the revised OFC Code, allowing for a six-month transition period for compliance with the new safekeeping requirements.

In addition, the SFC says it will introduce a statutory mechanism for the re-domiciliation of overseas corporate funds to Hong Kong as OFCs. The re-domiciliation mechanism will come into effect upon completion of a legislative process.

“The changes we announced today will put the OFC structure on a level playing field with other private fund structures,” said SFC chief Ashley Alder. “This is part of our ongoing effort to support the development of Hong Kong as a preferred fund domicile and full-service international asset management centre.”

In the consultation, the SFC received feedback that the proposed requirement for OFCs to keep a significant controllers register would present difficulties given their open-ended nature.

As such, a further consultation has been launched regarding the customer due diligence requirements for OFCs, to better align them with AML/CFT practices adopted by other investment vehicles for funds in Hong Kong.

Under the proposed customer due diligence requirements, OFCs would have to appoint a responsible person to carry out AML/CFT functions, similar to requirements imposed on limited partnership funds.